Amid the turmoil of the COVID-19 pandemic, the housing market has experienced its own unique set of challenges. Historically low interest rates spurred large numbers of homeowners to refinance their mortgages or move to new homes.
But these same low interest rates contributed to rapidly escalating home prices as buyers snapped up an ever-dwindling supply of properties. Now that rates are inching back up toward pre-pandemic levels, the frenetic pace of the past year is giving way to a new window of opportunity for warehouse correspondents — and mortgage professionals planning to become one.
Savvy mortgage bankers and brokers looking to partner with a warehouse lender will seize this opportunity to pause, refocus and take steps toward growing their business. This starts by adjusting to a decrease in market volume while leveling up revenue opportunities in both the short and long term.
Focus on compliance
A warehouse line of credit can be an effective way to grow your mortgage business. Warehouse lines provide entrepreneurial originators with access to capital so they can fund loans in their own name and become a lender.
A major advantage to funding your own loans is the added flexibility with compensation. As a correspondent lender, you are no longer restricted to the maximum 3% fee that applies to mortgage brokers who close their loans through other sources and not in their own name.
The capacity to earn more money, however, comes with added responsibility. As a broker, your responsibilities are fairly straightforward: Take the application, ensure that it is submitted within regulatory compliance guidelines and stay on top of three-day disclosure requirements. This process gets a bit more complicated when you are the lender as you become responsible for all of the initial, interim and final disclosures.
You must conduct quality control to make sure the loan complies with state and federal regulations. And, of course, you must eventually sell the loan to repay your warehouse line. Finding new ways to accomplish the final step — selling the loan — can be the key to growing your business as the red-hot purchase and refi markets fueled by the pandemic begin to cool.
Plan for growth
Whether you’re a new or established correspondent lender, it’s important to consider how a warehouse lender can serve you on both ends of the transaction and help take your business to the next level. Similar to borrowers, warehouse banks come in all shapes and sizes. Their lending capabilities can vary, so it’s essential to know their parameters.
When you’re just starting out with a warehouse line, you may find a better fit with a smaller bank that has experience helping originators become lenders, or in helping smaller lenders grow their companies. This also is an ideal time to review rates, fees and everything in between. Home-buyers often shop for the best interest rates and the lowest fees, and so should correspondents.
You should expect to pay the prime rate or a rate based on a common benchmark such as the London Interbank Offer Rate, plus a margin on the line of credit. Transaction fees also will apply.
If you have successfully grown your business over the past year, these terms can likely be renegotiated. Warehouse lenders recognize the value of reliable correspondents. By revisiting the details of your lending relationships, you may unearth new opportunities to increase your revenue — even if you’re closing fewer loans than you were at this time in 2020.
It’s also important to remember that not all warehouse banks are created equal, especially when it comes to nonagency lending. This makes it imperative to find a qualified partner if a portion of your growth strategy includes the diversification of your product offerings.
Many warehouse banks prefer to limit underwriting to agency products (qualified mortgages through Fannie Mae and Freddie Mac). If you’re looking to originate nonqualified or jumbo loans on a warehouse line, it may be worth exploring alternatives if your current lender doesn’t allow it.
Another way to continue growing your business in a market with declining housing inventory is to work with a lender that provides end-to-end support, allowing you the option to sell the loan after it closes. This arrangement can offer stability over the life of the warehouse line since the mortgages have a clear path from origination to final sale. This arrangement may not allow as much room for negotiation in the sales price of the loan, but it does provide efficiency for all parties involved. Documentation completed during the underwriting phase can be accessed quickly to streamline the final sale.
Selling loans to investors other than your warehouse bank also can provide new ways to increase your profits. If you have preferred investors outside of your warehouse bank, inquire about how they can get approved as a takeout investor on the line of credit. The investor will likely have to supply proof of financial stability and performance while the bank also may request product guidelines for review.
Once the investor is approved, the warehouse bank may require a copy of the investor’s loan approval or lock for each transaction you fund through the line. Selecting a warehouse bank with a wide variety of approved takeout investors will increase your ability to maximize profitability, although extra work may be required to ensure the warehouse bank approves of any investors you plan to work with when originating mortgages on your warehouse line.
These strategies, if approached in a collaborative spirit, have the potential to dramatically offset any flattening of your revenues. This reinforces the power over earnings potential that motivates many mortgage professionals to make the switch from being an originator to being a correspondent lender.
A warehouse line creates a revolving door of credit for writing and funding mortgages. Although the speed at which the door revolves may be lower in today’s market, industrious correspondents will recognize the opportunity to work smarter and increase their earnings potential by approaching their business with fresh eyes.
Relationships have always been the foundation on which the mortgage market thrives. A market in decline, however, doesn’t have to mean fewer opportunities. By checking in with your warehouse bank, negotiating mutually beneficial terms and expanding your relationships with investors, correspondents at every level can achieve success.
Partnering with the right bank that understands your business model and is willing to work closely with you through the process is critical. If you’re ready to more fully explore the full range of opportunities that come with managing a warehouse line, you’ll find this revolving door of opportunity to be turning at precisely the right pace. ●